Using markets to value stranded costs
The mechanism for valuing stranded costs and the market value of generating assets should be based on the workings of a competitive market, rather than relying on a regulatory mechanism that attempts to simulate such a result. The authors believe an auction to value generating assets is the best market mechanism to do so. The authors do not debate here the {open_quotes}fairness{close_quotes} of granting utilities full recovery of stranded costs, nor whether such recovery is consistent with the transition to an efficient and well-functioning market for electric generation. Instead, they focus on how stranded costs should be measured. Regardless of one`s views on stranded-cost recovery, some effort must be made to measure those costs as accurately as possible. In this paper, they argue that a market-based approach in the form of a broad auction of generating resources and contracts will provide the most accurate and fair method to value stranded costs. Market valuation mechanisms can work well even when there are not well-defined markets for the assets in question. The recent auctions by the Federal Communications Commission (FCC) of radio frequencies for personal communications services shows clearly that auctions can work effectively and fairly. In this paper, the authors argue that market valuation of generating assets through an auction will be preferable to any form of administrative valuation process. They also argue that an auction approach can be straightforwardly combined with {open_quotes}insurance{close_quotes} that can be purchased voluntarily by individual consumers to reduce their risk of overpaying stranded generating costs fixed by today`s market value of generating assets in the future, should those market values increase over time. This insurance, which is already used in real-time pricing contracts, can hedge risks to consumers more efficiently than ongoing administrative {open_quotes}corrections{close_quotes} to stranded-cost valuation.
- OSTI ID:
- 486401
- Journal Information:
- Electricity Journal, Journal Name: Electricity Journal Journal Issue: 8 Vol. 9; ISSN 1040-6190; ISSN ELEJE4
- Country of Publication:
- United States
- Language:
- English
Similar Records
The economics of stranded investment - a two-way street
The ABCs of market power mitigation: Use of auctioned biddable contracts to enhance competition in generation markets